NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Firm Data Points Towards Fed Pause

January 10, 2025
Shannon Saccocia, 私人財富部門投資長

Potential policy disruptions in 2025 may result in choppiness for stocks and bonds which may create opportunities to align portfolios with our best thinking

December’s non-farm payrolls release came in above expectations, up +256k versus the consensus estimate for +165k. The print was driven by gains in health care, leisure & hospitality, and government (+46k, +43k, and +33k, respectively); while even construction jobs grew by +8k manufacturing continued to struggle. Of note was the sharp rebound in retail hiring with +43k jobs added, more than offsetting the -28k posted in November. October’s low print was revised up once again by +7k while November’s strong print was revised lower incrementally by -15k to +212k. Average hours worked was steady at 34.3 for the fifth month in a row while average hourly earnings grew by +0.3% month-over-month and +3.9% year-over-year.

In addition to the strength in the establishment survey, the data firmed meaningfully in December’s household survey as well. Employed persons rose by +478k while unemployed persons fell by -235k in the month. The unemployment rate fell to 4.1% from 4.2% even as the participation rate remained stable at 62.5%. This consistency between the two surveys has been at points in the past year difficult to find, lending additional credibility to the belief that the U.S. labor market appears to be on a stable footing.

The current situation feels quite different from last September, when the Fed acted aggressively, cutting the fed funds rate by 50 bps in response to a weak July non-farm payrolls report. Since then, however, the Fed has cut rates twice more by 25 bps each time and, yet, the 10 year Treasury yield has surged over +1%. The rationale for this rise in yields is multi-faceted, driven by stronger absolute and relative growth expectations for the U.S. economy as well as evidence of still sticky inflation – which could be compounded by policy decisions from the incoming Trump administration. Following today’s release, expectations for another rate cut, which had admittedly already moved out past the Fed’s January meeting, have been further extended by several months.

The confluence of sharply higher yields, lofty U.S. stock valuations following two strong years of gains, and the potential for policy disruption is resulting in choppiness for stocks and bonds to begin 2025. With earnings season kicking off next week, however, good news may be on the horizon as stronger U.S. economic growth should benefit top and bottom line growth – a conclusion reflected in the earnings growth estimates for the U.S. markets this year. Our view, however, is that this choppiness may be with us for a bit but given our constructive views on the economy and equity markets for this year, we are considering any pullbacks as opportunities to align portfolios with our best thinking.

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